Problems:
1) Net Present Value: The Goldman's are considering adding a new piece of equipment that will speed up the process of building bobble heads. The cost of the piece of equipment is $42000. It is expected that the new piece of equipment will lead to cash flows of $17000, $29000, and $40000 over the next 3 years. If the appropriate discount rate is 12%, what is the NPV of this investment? Explain the findings.
2) Incremental Analysis: If production does increase dramatically after their presentation on Shark Tank, the Goldman's will need more space for production. They have two options. Option 1 is to rent out a spacious warehouse nearby. If they pursue this option, there rent will be $1200 per month and utilities are estimated to cost an additional $350 per month. Their second option, Option 2, is to rent a smaller storefront space that is also nearby. The storefront rent is $1350 per month. However, utilities will likely only cost an additional $150 per month. They want to compare their options over one year's time (since each rental contract is a 1 year commitment). What is the incremental analysis if the Lees choose Option 1 over Option 2?
Income Statement Data:
Units produced and sold = 420
Sales ($80 per unit selling price) = $33600
Cost of goods sold ($30 per unit, all variable costs) = $12600
Labor = $0 (Mr. and Mr. Lee were the only ones working and did not pay themselves)
Advertising fees =$2000
Bank fees = $150
Phone/internet = $1200
Shipping ($3 per unit) = $1260
Utilities = $900
Office supplies = $800
Interest expense on note payable = $350
Depreciation expense (straight line) = $800
Income tax rate = 26 %
Other Financial Data for 20XX:
Proceeds from sale of equipment = $3000. The equipment originally cost $1000 and had accumulated depreciation of $200.
Purchase of equipment = $1600 (The machine is purchased on the last day of 20XX so no depreciation expense is recorded.)
Repayment of note payable = $5000
Consider any data relevant from the income statement.
Balance Sheet Data for Beginning of 20XX:
Cash and cash equivalents = $10000
Accounts receivable = $0 (Cash is received at time of sale)
Raw materials inventory = $10500
Equipment = $5000 (This includes the $1000 cost of the equipment sold in 20XX).
Accumulated depreciation = $1,000 (This includes the accumulated depreciation of 200 for the equipment sold in 20XX.
Accounts payable = $0 (Cash is paid at the time of purchase.)
Note payable = $5000 (This is the note payable which is repaid in 20XX)
Common stock = $15000
Retained earnings = $4500